What is the new Break even in Dollar Sales? (Using the information below) Morton

Question

What is the new Break even in Dollar Sales? (Using the information below)

Morton Company’s contribution format income statement for last month is given below:

Sales (43,000 units × $27 per unit)

$

1,161,000

Variable expenses

812,700

Contribution margin

348,300

Fixed expenses

278,640

Net operating income

$

69,660

Rather than purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Rather than pay sales commissions, which are currently included in variable expenses, the company would pay salespersons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach would increase unit sales by 50% without any change in selling price; the company’s new monthly fixed expenses would be $348,300, and its net operating income would increase by 25%. Compute the break-even point in dollar sales for the company under the new marketing strategy.

Sales (43,000 units × $27 per unit)

$

1,161,000

Variable expenses

812,700

Contribution margin

348,300

Fixed expenses

278,640

Net operating income

$

69,660

Explanation / Answer

break even point in dollar sales = fixed costs / PV ratio

here,

fixed costs = $348,300..

PV ratio = contribution / sales

contribution = net operating income + fixed expenses

net operating income =>$69,000 + 25%

=>$86,250.

now,

contribution = $86,250 +348,300 =>$434,550.

sales = (43,000 + 50%) =>64,500 units.

=>64,500 units * $27 per unit

=>$17,41,500.

PV ratio = contrbution / sales

=>$434,550 / 17,41,500

=>0.2495263

=.0.25.....(rounded to two decimals)

break even point in dollar sales = $348,300 / 0.25

=>$1,393,200.

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